Bearer bonds are the un-registered bonds issued by a corporation or a government. Unlike other bonds in which the details about the owner are recorded, Bearer bonds keep no such records. The person, who has the Bearer bonds in his possession, is considered as the owner of the Bearer bonds and receives all benefits even if he is not the investor. Bearer bonds are generally preferred by the people who want to maintain anonymity.
In case the Bearer bonds are lost, stolen or destroyed, nothing can be done to recover its values since no records are kept.
Bearer bond holders get coupons for payment of interest at the time of buying the Bearer bonds. These coupons have to be submitted by the bond holders to the issuer for the payment of interest rate, which is generally given at half-yearly intervals.
History of Bearer Bonds:
In United States, Bearer bonds were used possibly for the first time in post-Civil war era. Also, it played an important role in the reconstruction period from 1865 to 1885. Europe and other countries also started adopting Bearer bonds. Since Bearer bonds could be easily transferred and issued in large numbers. United States banned the issuance of Bearer bonds in 1982 since they were increasingly being used by the tax evaders, money lenders taking benefiting from the anonymity clause of the Bearer bonds.
United States made a regulation that if issued after 1982, the issuer of the Bearer bonds would be taxed on the interest on such bonds in case of corporate bonds while in municipal bonds, the bond holders would have t pay tax on the interest.
Risks involving Bearer bonds:
- Anonymous owner is the biggest risk. Since Bearer bonds do not carry owner’s name on the bond, the principal amount and the interest would be paid to the person who possesses Bearer bonds even if they are not the rightful owners. The bearer bond holders just need to submit bond certificates for the repayment of the municipal amount in cash and no questions would be asked about the owner of the bond. In case, Bearer bonds are lost, stolen or destroyed, there is no way that the rightful owner can be identified and interest or principal amount can be traced.
- Since Bearer bonds are unregistered bonds, it is the issuer’s credibility which is considered a guarantee for payment of interest and principal amount. In cases, where the issuer dies or before the maturity period of bearer bonds, the bearer bond holder has no option left to recover his money. He cannot even approach a court as his identity would be revealed.
Many books were written and movies made with the backdrop of illegal use of Bearer bonds. After World War I, Bearer bonds were used as a means to avoid paying tax and later Bearer bonds were used for funding illegal activities. Though United States banned Bearer bonds in 1982, US corporations still issue Bearer bonds through Euro bonds. Interestingly in 1985, US legalized sale of Bearer bonds to foreigners through US treasury bonds.
- Bearer bonds are callable i.e. the issuer can call or buy back the Bearer bonds before the maturity when interest rates are high so that they can cut the costs to the issuers. Bearer bonds have long maturity periods. Though the issuer of Bearer bonds do not bide by the rules and regulations framed for registered bonds, they do have to follow the agreement between the issuer and the holder at the time of issuance in letter and spirit. If the agreement stipulates that interest would be paid twice a year, the issuer has to follow it no matter what happens.
Difference between Bearer bonds and registered bonds:
- Bearer bond holders can sell their bonds with no interference either from the company or government. Since Bearer bonds do not carry the name of the owner, the holder has to give just the certificate to the potential buyer in exchange of money. On the other hand, the issuer of the registered bonds keep the records regarding the owner of the bond and in case of sale, the present holder of the bond has to inform the issuer about the sale so that the name of the buyer can be recorded.
- Bearer bond holders are responsible for the safety and security of the bonds, collection of interest by depositing coupons to the issuer and re-payment of principal amount while the issuer of the registered bonds have to shoulder all these responsibilities and do the paper work keeping a record of the ownership and all kinds of transactions.
- In registered bonds, it is easier to trace taxable income but tracing the taxable income is not possible in Bearer bonds since there are no records about the ownership of such bonds.
The future of Bearer bonds looks bleak because of its misuse by money launderers and tax evaders.